This year’s budget speech saw an interesting remark from the former Finance Minister Bishnu Paudel. The government decided to levy a Budhi Gandaki Hydropower tax to the citizens. In its defence, the government also further stated that entire Nepali people would not have to bear the burden of this new tax. The taxes would be charged only on petroleum products, and what’s more noteworthy, they said that the Nepal Oil Corporation would bear the entire burden, without transferring that to the customers of the petroleum monopoly.

Here is an excerpt from the budget speech:

Now how would the government extract a tax without burdening the customers? Let’s take a look at the pricing system of NOC.

If you look at the above appendix, we have highlighted three sub headings of this pricing system. An infrastructure tax ( for Budhi Gandaki Hydropower) which is Rs 5 on petrol (gasoline) and so on, which is added onto the government revenue. If we look below, two more things are added into the price that a customer pays, first one is for NOC’s infrastructure development and second one is for NOC’s profit.

Now, we would expect NOC, a government monopoly to fund infrastructure tax of Rs 5 in petrol, diesel and airplane fuel, from the profit and NOC’s infrastructure development expenses that it charges from the people, which is not at all the case. Instead, what they have done is make use of declining oil prices in the world market which has allowed them to ostensibly “decrease the price” and still scupper huge amounts of profit to fund their bonuses.

Henry Hazlitt’s book “Economics in One Lesson” is a rigorous case against the ideals of government interventionism in the market economy. In this book, Hazlitt takes an angle first conceived by Frederic Bastiat, an 18th century French Economist. Bastiat famously quoted, “Government is the great fiction, through which everybody endeavours to live at the expense of everybody else”, which was to say, the idea that government works for all is as big a lie as sun revolves around the earth. It only sounds nice in fiction and idealism.

In reality a government while arguing for a case, totally disavows another part of the economy. For example, when a government says it will provide benefits to certain sector like agriculture, because it is “vulnerable” or “important”, what it is actually doing is taxing the productive sector and funnelling the money into a competing sector that might not be as productive. For many years, the Nepalese government has been subsidising the petroleum products through a government monopoly, but has the government ever considered where the subsidy is funded from. It is ultimately funded from the taxpayers’ money, from different sectors of an economy.

The most important argument he makes is on “Broken Window Fallacy”. The idea of “Broken Window” is that when a glass window breaks, the owner has to replace it. This circulates the money to the producer of the glass, the carpenter, the transporter and similarly around a large section of the economy, which stimulates economic activities. Hazlitt argues that this fallacy wrongly assumes that it is the breaking of the glass window that stimulates the economy through increase in circulation of money. Rather, if the glass had never been broken, the money could have been invested in an alternative sector, which would further revitalise the economy. The breaking of the window has merely diverted money into another endeavour which would have been better if avoided. In de-constructing “Broken Window Fallacy”, Hazlitt makes a strong case against Keynesian Economists-economists who follow the economic doctrine professed by John M. Keynes.

In another case, Hazlitt posits that “progressive taxation,” which is identified as all noble, also hurts the economy. When the rich in an economy are taxed higher, the amount they can save and re-invest decreases. Since they have a higher marginal propensity to save and a higher marginal propensity to invest in comparison with poorer individuals, this amount that could have been invested back in an economy is lost. As a result, it hampers the productive capacity of an economy.

The book also furthers its case against minimum wage law which is a popular political agenda, even in Nepal. He argues that “minimum wage” in idealism tries to uplift the living standard of poorer classes in society. However, in reality it actually hurts the poorer classes, because minimum wage increases the cost of production for a producer. The producer then has to lay off the workers to decrease its cost. As such what was seen as a way of helping the poor ultimately hurts them.

Hazlitt furthers criticises many policies that seem noble in political eyes but do not make economic sense. When the policies are not economically viable, no matter how much benevolent they seem, they will decrease the economic dividends a nation derives from a free functioning market. He makes an strong case against protectionism, taxation, subsidising certain industries at the expense of another, etc.

This book is an influential criticism against some of the intriguing fallacies in Political Economy. However, the book lacks somewhere in providing policy measures for certain economic challenges like depression, controlling inflation, or social challenges like distributive justice. This doesn’t necessarily undermine the value of “Economics in One Lesson.” This book does more than merely point to solutions of the economic challenges; it helps us understand the multidimensional phenomenon that “market” is. This book explains, eloquently, how any form of government intervention has counter-productive effects in a market economy, no matter the intentions. Often times, the unintended consequences outweigh the intended benefits.

For a country, where economic development has been sluggish at best, and socialist policies are taken as virtues to development rather than stumbling blocks towards free functioning of an efficient market, this book is a great read.

More than two centuries ago, a Scottish economist and moral philosopher Adam Smith born today, seeded the vision of a prosperous nation that becomes contextual in the case of today’s Nepal. In his book, “An Enquiry into the Cause and Consequences of the Wealth of Nation” he writes, “the wealth of the nation is fundamentally the productive labour of its people. “

He points out that it is not the wealth of the government or it’s spending capacity but the productivity of its labour that is the wealth of the country.

Nepalese government recently passed a budget roughly 50% of our Gross Domestic Product(GDP). It shows a huge involvement of government in economic planning. With more involvement of government in an economy, simultaneously the government expenditure and its power increases. When powerful government, and a central planning together try to direct the actions of people, in all probability they will work in their own self interest rather than the people’s. Even if they work for people’s interest, it will be increasingly difficult to cater to all sentiments because different people in society are guided by their own principles and interest.

Free Market Vision

Abiding by this logic, Adam Smith introduced the idea of “Free Market”, which in its inception was visionary. It was the framework in which the industrial revolution proliferated. The modern industrialised countries are the beneficiaries of Adam Smith’s idea.

In a free market economy, buyers and seller trade to meet their self interest. For example, X needs shoes but it can only make breads, while Y needs bread and can only make shoes. When they trade, both the parties benefit by sufficing their self interest. It further incentivizes X and Y to be more productive and increase their returns by making more shoes or breads. This increase in productivity in turn increase the wealth of the nation.

However, when a government plans that one cannot trade shoes with bread, or gives selective advantage by taxation or subsidies to some other good, this trade might not occur. As such, the needs of X and Y are not fulfilled which negatively affects their productivity.

Similarly, there could be other instances where self-interested parties can become creative in meeting their needs by becoming more productive and innovative. The market can be conducive to changes in demand if people are left to their self-interest.
While moving forward, Nepal cannot expect a economic transformation solely through economic planning, because in many cases such planning are in direct conflict with the self interest of the people. As Adam Smith conceives, “things do not have to be planned to be orderly”, similarly, we don’t always require central planning of the economy for the economy to be prosperous. Rather if the people are left to pursue their self-interest, they become more productive, ultimately increasing the wealth of the nation.

Limited Government

“It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” Through this quote, Adam Smith articulates that since private actors in market are not driven by benevolence, they are likely to collude and try to get undue influences from government. Even in his lifetime Adam Smith had seen the East India Company grow in its might as a monopoly and a quasi-government entity. For Adam Smith it was against the spirit of free-market when the government and the private enterprise colluded with each other for their selfish motives.

Even in Nepal, the syndicates and the private enterprises collude with government in bringing policies that safeguard the interest of these entities and chase away the prospective competitors. Transport syndicates are one example of it.

As the example suggest, this undue influence would not be possible if the government in itself was limited in its power to change the dynamics of free market.